Pay For Climate Performance

Linking greenhouse gas (GHG) emissions targets to compensation is one important means by which CEOs can be incentivized to achieve timely and systematic progress on climate. This report is a first step in assessing how effectively companies are currently linking GHG emissions reduction incentives to CEO pay. The percentage of companies integrating ESG goals in compensation is rising rapidly as investors push for climate progress. 1 In 2021, 52% of S&P 500 companies reported including ESG metrics in compensation while 69% of companies report they will be included in their 2022 compensation packages. 2 While this indicates some progress, such generalized linkages are generally insufficient to drive climate progress. As more companies begin to link GHG emissions reduction to compensation, it is important that it be done in the most transparent and impactful way.

This report provides investors with key criteria to evaluate the use of climate metrics in CEO pay. As You Sow analyzed the 2021 CEO compensation packages of the 47 U.S. companies included in the Climate Action 100+ (CA100+) Initiative. CA100+ is an investor-led initiative with $68 trillion in assets under management working to ensure that the world’s largest corporate GHG emitters take action to reduce emissions. The CA100+ companies are responsible for 80% of corporate emissions and, thus, incentivization for emissions reduction performance in these companies is particularly timely.

The companies were assessed on three indicators:

• inclusion of a climate metric in the 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals;

• inclusion of measurable climate metric and measurable pay; and,

• inclusion of climate metric in the long-term incentive plan.

We found the 47 U.S. companies assessed in this report either have no linkage between CEO pay and climate metrics or do not adequately tie CEO pay to climate performance metrics at the level of incentivization required to achieve alignment with global 1.5° C emissions reduction goals. While having a specific emissions reduction incentive is an important step for companies, not all emissions reduction metrics are equal. Investors should pay particular attention to the interaction of compensation design and the rigor of the climate metric.

Endnotes

1. 2021 Global Benchmark Survey by ISS reports 87% of investors responding to the survey want ESG metrics in company incentive plans. Kathy Belyeu, Colleen Lloyd, Audrey Ramming, and Sarah Riggs, 2021 Global Benchmark Policy Survey: Summary of Results, ISS Governance, October 1, 2021, https://www.issgovernance.com/file/publications/2021-global-policy-survey-summary-of-results.pdf, p. 9.

2. Ira T. Kay, Mike Kesner, and Joadi Oglesby, ESG Incentives and Executives, Harvard Law School Forum on Corporate Governance, May 24, 2022, https://corpgov.law.harvard.edu/2022/05/24/esg-incentives-and-executives/.

KEY FINDINGS

• 89% of the assessed companies received D or F grades for climate-related pay incentives. 42 of the 47 assessed companies received D grades or lower for failing to include rigorous quantitative climate-related metrics with measurable payout or long-term incentive components. A summary of the climate incentive grades by company is given in Figure 1.

• Of these 47 highest emitting U.S. companies, 25 have not explicitly linked any climate related action to CEO pay. Fifteen have some type of climate-related incentive tied to compensation. Six companies link a quantitative climate incentive to CEO compensation. Only one of the assessed companies has a GHG emissions reduction metric tied to compensation.

• Xcel Energy received the highest score (B). Xcel Energy received a B for linking CEO pay to emissions reduction performance in its long-term incentive plan, with a measurable amount of pay related to achievement of reduction goals.

• None of the assessed companies received an A grade. An A grade requires linking CEO compensation to a science-based, 1.5° C aligned, emissions reduction target across Scopes 1 (direct), 2 (purchased energy, and 3 (suppliers and consumer use).

• Lack of transparent disclosure in company proxy statements makes it challenging to differentiate between effective CEO pay links and negligible or performative inclusions. Companies can improve transparency by linking quantitative climate metrics to a measurable amount of pay, allowing investors to better assess emissions reduction impact and amount of incentivization.

• Climate metrics are more commonly included in the annual bonus rather than long-term incentive structures, likely resulting in limited incentivization since annual bonus is generally a smaller portion of total compensation. Of the 22 companies with any type of climate-related metric, only 23% included such metric in the long-term incentive plan.

• The amount of pay tied to most climate metrics was negligible relative to overall compensation package size and thus generally inadequate to incentivize behavior. The climate metric was often only one of many metrics used in determining annual bonus, which is typically dwarfed by equity awards.

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